NOVAGOLD RESOURCES INC quarterly report, Q3 FY2018

NOVAGOLD RESOURCES INC. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended August 31, 2018. Amounts below are in U.S. dollars. NOVAGOLD is a gold exploration and development company with no realized revenue from its principal business. Its principal continuing asset is a 50% interest in the Donlin Gold project in Alaska, operated through a joint venture with Barrick.

Financial performance and position

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Operating loss	$6.9 million	$7.8 million	$21.2 million	$24.0 million
Net loss from continuing operations	$8.0 million	$9.8 million	$25.2 million	$28.0 million
Net loss from discontinued operations	$80.6 million	$0.6 million	$81.2 million	$1.0 million
Total net loss	$88.6 million	$10.4 million	$106.5 million	$29.0 million
Basic and diluted loss per share	$0.27	$0.03	$0.33	$0.09

Revenue and operating margins are not applicable: the company reported no realized revenue from its planned principal business.
At August 31, cash and cash equivalents were $14.0 million and term deposits were $152.0 million, totaling $166.0 million. Total assets were $263.2 million; total liabilities were $97.6 million and equity was $165.5 million.
Continuing-operations cash used in operating activities was $8.0 million for the nine months. NOVAGOLD funded $7.8 million of Donlin Gold work. Overall cash and cash equivalents declined $14.0 million from November 30, 2017, while cash plus term deposits increased $82.0 million, principally reflecting the Galore Creek sale proceeds.
The Barrick promissory note had a carrying value of $94.8 million, comprising $51.6 million principal and $43.2 million accrued interest. Interest accrues at U.S. prime plus 2%; repayment is tied to future Donlin production revenue or proceeds from a reduction in NOVAGOLD’s interest.

Material changes and unusual items

On July 27, 2018, NOVAGOLD sold its 50% Galore Creek Partnership interest and 40% Copper Canyon interest to Newmont. It received $100.0 million cash and notes with a combined initial fair value of $88.4 million. The notes provide for $75.0 million upon the earlier of a new pre-feasibility study or July 2021, and $25.0 million upon the earlier of a feasibility study or July 2023. A further $75.0 million note is contingent on approval of a construction plan and was assigned no value.
The sale generated an $80.0 million after-tax loss, driving the reported total net loss. NOVAGOLD attributed the loss mainly to the book value of disposed assets exceeding net proceeds, partly offset by foreign-currency translation reclassification and a deferred tax recovery.
Continuing-operations losses improved versus 2017, largely from lower general and administrative costs and Donlin project expenses. For nine months, general and administrative expense fell $2.2 million, primarily because of lower share-based compensation. Higher interest expense on the Barrick note partly offset the improvement.
Donlin’s equity-method loss was $7.3 million for the nine months, versus $7.8 million in 2017. The reported $1.6 million Donlin investment balance primarily represented unused funds advanced to the joint venture.

Outlook, developments and risks

Management forecast 2018 spending of approximately $23.5 million, $4.5 million below its original expectation: $11 million for general and administrative costs, $11 million for NOVAGOLD’s Donlin share, and $1.5 million previously funded for Galore Creek. Management said existing cash and term deposits were sufficient for anticipated project funding and corporate costs, but additional capital would be needed if Donlin engineering and construction proceed.
The Donlin federal NEPA review was completed and a favorable federal Record of Decision and Clean Water Act Section 404 permit were issued in August 2018. Several state permits were also issued; other state approvals, including reclamation/closure and integrated waste management permits, were expected by the first quarter of 2019. Dam-safety certificates remained dependent on further fieldwork and engineering.
Donlin’s owners had not approved a construction program or budget. Timing and any development decision remained dependent on engineering, permits, financing, commodity prices, and other factors. The company identified public opposition, litigation or permit challenges, and requests for further review as potential sources of delay.
A ballot initiative concerning Alaska fish-habitat permitting was scheduled for a November 2018 vote. Donlin believed approval could make new or modified fish-habitat permits difficult to obtain; the company said the initiative’s outcome and effect were uncertain. Local tribal and community groups had also adopted resolutions opposing the project.
NOVAGOLD cautioned that it does not generate operating cash flows and that continued operations depend on financing or future cash flows. Construction financing could require debt, equity, project-specific debt or other sources, with no assurance of availability on favorable terms or at all. Other cited risks include gold-price and market volatility, permitting and infrastructure challenges, joint-venture partner cooperation, and interest-rate exposure. A 1% change in U.S. prime would change annual accrued interest on the Barrick note by approximately $1.0 million, all else equal.

Important facts for investors to verify

Whether the remaining Donlin state and federal approvals are obtained, and whether appeals, litigation, or the fish-habitat ballot measure affect them.
Whether Barrick and NOVAGOLD approve additional engineering, a construction program, and a financing plan—and the expected capital requirements and timing.
Collection timing and terms for the $100.0 million of Newmont notes, and the conditions for any contingent $75.0 million note.
Cash and term-deposit balances, forecast spending, and potential future financing needs as Donlin advances.
The accrued balance and variable-rate cost of the Barrick promissory note, whose repayment depends on future production revenue or specified transaction proceeds.